All Roads Lead to Beijing

Section One:
We all know the China story. We see the consequences of it on our stock market five days each week, BHP and Rio Tinto rise and fall as commodity prices rise and fall. Even when the US market is rising and falling there is the tendency to draw everything back to China and its economic prospects.

All roads lead to Beijing.

The question which everyone wants answered is ‘Will China continue to grow?’ The Chinese government enforced the closure of many industries leading up to the Olympic Games as it attempted to improve the air quality for athletes. Now the Olympics are over it is game on again for China and for its industry.

The amount of construction in China cannot be overstated. It only took watching the Olympic road cycling races or the marathon on TV to see the sheer number of uncompleted building projects in Beijing.

Today in Shanghai, China’s tallest building will be officially opened. The 492 metre, 101 storey Shanghai World Financial Center is the worlds third largest building after the Dubai Tower and Taipei 101. According to the owner of the building, Minoru Mori “total office space in Shanghai is not so large, there is not enough taking into account the business potential of the city. If you supply a good space, then the demand will follow.”

We admit that a statement like that sounds like a property bust waiting to happen. But not yet. And possibly not for a long time yet.

One thing that is often overlooked is that China still has an enormous rural economy. A rural economy where the average annual income is little more than $600. Even in the urban areas the average wage is only about $2,000 per year.

China isn’t standing still. The wages growth for Chinese farmers was 10% for the first six months of this year. Rural wages will need to grow too.

The last thing that the Chinese government would want is for the countryside to be emptied. Now, that’s the extreme and in reality it isn’t going to happen, but the point is that rural wages cannot afford to be left behind. Rural Chinese citizens will need an ever greater incentive to stay rural as the cities become bigger and richer.

That among others is one of the next big challenges for China.

The Most Important Story This Week:
The gold price has rebounded recently following a brief period under USD$800. It wasn’t that long ago that it was trading above USD$1,000, so which way is the gold price going to go next? Money Morning technical analyst Gabriel Andre gave his view on that during the week. Gold to Test Support

Monday: Rule 1. When taking over as CEO of a company make sure that you shift the blame for all the bad stuff on the previous mob. ANZ in Denial

Tuesday: With net profit totaling just $556 million, down from just over $1 billion the previous year, Suncorp has maintained its dividend payment at $1.07, which means that it has a dividend payout ratio of 183%. Financials, Is It Safe?

Wednesday: just like the BHP Billiton results, much of the earnings increase has come as a result of commodity price increases. While that is fine, and it deserves it having suffered through periods of low commodity prices, there is little in the results that would convince BHP that it needed to pay any more than is already on the table. Rio Tinto Releases Results

Thursday: Macquarie may not have the same exposure to leveraged funds that Babcock & Brown [ASX:BNB] has, but it is still being dragged down nonetheless. It is going to take a complete cleanout of this sector before investors can start to have any confidence in companies that have any association with leveraged infrastructure funds again. Not So Big Macq

Just when resources bears had convinced themselves that the China induced resources boom was over, and that the ending of the Olympics would symbolically reflect this, the Chinese have swept over the horizon to let everyone know that they are still here.

You may recall that back in February, Aluminum Corp. of China paid USD$14 billion for a 9% stake in Rio Tinto [ASX:RIO]. Although the shares were bought through Rio’s London listed shares and it was below the 15% threshold set for foreign ownership, Chinalco still went through the process of applying to the Foreign Investment Review Board for approval.

The Treasurer has now given the approval which means Chinalco can buy up to a 15% stake in Rio before it will need to go back to the FIRB.

It would seem likely that Chinalco will pursue taking a shareholding to that level, as there is minimal regulation on the UK side until its shareholding reaches 30% which would trigger a forced takeover bid for the whole of Rio. It’s questionable whether the Chinese have any interest in pursuing the matter that far, as it is more likely they are keen to be actively involved in the takeover discussions between BHP Billiton [ASX:BHP] and Rio, to perhaps gain some business concessions in return for supporting the takeover.

 takes a technical look at the Rio share price below

The stock (ASX:RIO) is still backed by a long-term bullish trend started in early 2007. It has posted low prices during this month of August but found this long-term support and has been bouncing back for 6 days now.

Despite a false break generated by the plunging equity markets one year ago when the subprime crisis blew up, the support line of the bullish trend remains valid. It means that over the long-term, the lows are posted higher. Therefore the slope typically illustrates an increasing price development.

From May 19, which is the historical high price, to August 13, RIO fell by 30%. The fact that the long-term support has been tested and validated twice recently argues for the end of this 30% decrease. The bearish trend is therefore completed. It is likely to open the way to a new bullish trend.

The first bullish indicator is that the price action succeeded to breakout above its resistance line. This resistance line was built by the high prices posted during the 3-months decline (points C, D, E and F on the chart). Each time the price action failed to go higher as there was not enough momentum, not enough conviction from investors to jump further into the stock.

The perspective has changed now as this barrier has been cleared last week. This resistance line was also strengthened by the 40-day moving average which was plot just above and was also acting as a resistance. Last Friday RIO closed at $122.17, well above its 40-day moving average: it’s another bullish signal. The stock has therefore already rebounded by almost 11% since the low of August. There is more to come.

The technical indicators show that a further move on the upside is probable. The MACD has triggered a bullish signal as it has crossed above its signal line. So did the 21-day technical momentum indicator as it jumped above the 100 level. It means that some momentum is building and that more and more money is currently flying into the stock. Both increasing volume and price are creating this bullish momentum.

In this scenario, investors should pay attention to the retracement levels of the recent 3-months decline. Short-term traders may take profit around those levels. The Fibonacci ratios show that the 38.2% level corresponds to $128 and that the 50% level corresponds to $134. These are the first objectives for the current price action.

On the downside, a pull back towards the long-term support line might occur, but only a breakdown below this support level would be a new strong bearish signal.

australia stock market is up 98. The SFE Futures predicted an 84 point rise. More than a couple of comments from colleagues about how ridiculous the market is at the moment…volatility is massive….and “what chance do you have” trying to trade it. The reply is to say that extreme volatility is often the pre-cursor to change - after a 28% fall in the market….lets hope so. Financials up 3.4%, Resources also up 1.8%.

The Dow Jones “Lotto” index was up 266 reversing the 240 point fall yesterday. Up 267 at best closing on its highs. Down 3 at worst. It was basically the falling oil price, better-than-expected 2Q reports and increasing consumer confidence that did the trick. Financials closed up 7.5%, with investors thinking there are better times ahead for the sector. Lehmans up 11%, Bank of America increased 15%, JP Morgan up 8.2%. Merrills announced it would sell $30.6bn worth of ABS CDOs for only $0.22 in-the-dollar, or for $6.7bn – a remarkable discount – to strengthen its balance sheet. The sale will mean a $4.4bn pre-tax write-down in the 2Q. Merrills has had $51.8bn in write-downs and credit losses since the credit crisis started. In other news, US Steel Corp up 14% in the biggest one-day jump since 2002 posting 2Q profit that doubled on higher prices and July consumer confidence better-than-expected – rose 2% month-on-month – up to 51.9 and the first gain in 6-months – boded well for stock market. Earnings have topped estimates for ¾ of the 255 companies that have reported 2Q results so far – but profits down 23% on average and the earnings for banks are down 90% while the earnings in the discretionary sector are down 33%. The NASDAQ also had a strong session – up 2.45%.

• Both BHP and RIO up in ADR form overnight, 2.4% and 1.7% respectively.
• Metals all down overnight – Nickel down 3.79%, Zinc down 2.4% and Aluminium 1.92%. Copper down 1.08%.
• Oil price down $2.51 to $122.21 – hit a 7 week low – despite concerns of a militant attack on two Nigerian crude pipelines.
• Gold down $11.20 to $916.50
• Bonds up with the 10 year yield down to 4.03%.

ABN AMRO is the latest bank to cut their recommendation on the Australian bank sector (to Underweight from Neutral). They tell us the sector is likely to underperform until there is clarity on where bad debt levels will peak. They cut ANZ to HOLD from Buy and St. George (SGB) to SELL from Hold. The NAB is ABN AMRO’s only BUY recommendation. They expect flat dividends and underwritten dividend reinvestment plans across the sector, and there is now a risk of capital raisings. GSJB Were went underweight banks yesterday with a SELL recommendation on the ANZ. ANZ up 50c to 1603c, SGB up 3.5% to 2659c.

BHP Billiton have released its Letter to Rio Tinto shareholders. BHP warn RIO would be trading lower without their takeover proposal and Chairman Don Argus says BHP’s offer of 3.4 BHP for 1 Rio share represents a “substantial premium” of 45%. BHP expects the various regulatory approvals for the deal to be completed by the end of 2008, after which BHP should be in a position to send offer documents to RIO shareholders. BHP up 82c to 3909c.

We have had a busy morning on the announcement front…

• Aristocrat Leisure (ALL) down 17% (down 21% at once stage) after announcing late yesterday that its FY profit to will be down as much as 23% due to currency issues. (Weak US$, Strong AUS$ - highlights the issue for other stocks). Now expects earnings for the current year to be between $190m-$200m compared to previous guidance of $247m.
• Austar United Communications (AUN) down 4% – Good results but hasn’t done much for the share price – EBIT up 20% against guidance of up 20% - has announced a 1H loss of $7.6m compared to a $24.7m profit last year. AUN interest bill for the half rose to $30.8m from $20.7m.  AUN down 4.5c to 121c.
• Lihir Gold (LGL) said 2Q gold production came in at 177,000 ounces, up 27% on the previous Q. Maintained its guidance for FY production of more than 850,000 ounces of gold. Also mentioned that commercial production from Ballarat is due to commence in the 4Q.  LGL up 3c to 292c.
• AED Oil (AED) up 12% - it has produced 340,000 barrels of oil in the June Q. Output was impacted by a short sut-in for routine review. Output to date is at around 1.6m barrels. AED up 25c or 11.2% to 247c.
• The National Australia Bank (NAB) board is due to meet in Melbourne today. The Australian reported this morning that CEO John Stewart might be given his marching orders on the back of plans of a further $830m provision for its exposure to the US. NAB up 55c to 2533c.
• Rio Tinto (RIO) have announced they will spend $2.15bn to expand their Corumba iron ore mine in Brazil. IT wants to increase production to 12.8m metric tonnes by 2010. Ausenco (AAX) has been awarded the US$140m contract for the mine. RIO up 255c to 12170c.
• Broker downgrades this morning for Alesco (ALS) after saying yesterday its outlook will remain challenging despite announcing a solid profit yesterday. UBS cut to NEUTRAL from BUY, ABN AMRO to HOLD from BUY. ALS up 3c to 678c.
• Mirabela Nickel (MBN) up 5% - it has announced a 40% increase in production capacity at its Santa Rita nickel project in Brazil to 27,000 tons. It is due to start commissioning in mid-2009.  MBN up 23c to 424c.
• Bradken (BKN) has priced a $110m institutional placement to fund the acquisition of AmeriCast Technologies Inc. Placement will result in the issue of around 13.7m additional shares at an issue price of 805c. BKN up 13c to 897c.
• Macquarie Group (MQG) has upped their shareholding in Auckland Airport to 5%. MQG up 6.6% to 5168c.
• GSJB Were has increased their forecasts for headline inflation. Now expects headline inflation to average 4.4% & 3.6% in 2008 & 2009 respectively.
• Australian building approvals fell 0.7% in June from May - below expectations of a +1.7% rise, but well above 7.2% fall in May.